Whether you manage tax yourself or have an accountant, it pays to understand risks, obligations and how to improve the tax effectiveness of your business. Muhunthan Kanagaratnam of Gilbert + Tobin gives us the lowdown.
For our small business readers first, what are some of the tax advantages for those running a business from home?
The general principle applies that anything that you incur in relation to conducting your business is deductible. It’s obviously a bit trickier when you’re talking about a home office environment because you have a mix of what the purpose of incurred expenditure is. For example, if you’re using a computer for personal and business use you would need to do an apportionment. There is no hard and fast rule for the proportion or percentage of things you claim. It’s often on an estimated basis such as if you have an office in a three bedroom house you might claim a quarter of your utilities bills.
Generally, deductions will include: computers; phone and other electronic devices; depreciation costs for equipment that you use including office furniture; phone and fax line rentals; utilities such as electricity and gas; repairs and maintenance; cleaning expenses; and occupancy expenses such as rent and land tax. The important thing is to make sure that the amount you’re claiming is reasonable for the amount of space you’re using for your business activity.
The Australian Tax Office (ATO) has guidelines online which help to identify the home office. One of the things that they require is that it is a designated space that is used almost exclusively for the business.
What are other common deductions people should keep in mind and can anyone claim these if they are relevant to the business?
Other deductions include travel expenses, such as travelling from work to a customer. With travel and car expenditure you can’t deduct for getting to work but once you’re at work it can be deductible.
Education related to your business, such as courses and conferences, can be claimed. If you’re doing a course to expand your role or business then that can be difficult to claim but if it’s education within the confines of the business that’s deductible.
For large businesses the deductions are pretty much the same – there’s no differentiation between small and large businesses except the scale. If they have sales staff who are travelling a lot all of that expenditure would be deductible.
Could you list some of the most important steps small and large online businesses need to take during the year and in the lead up to June 30 to prepare for tax time?
Nearing the end of the financial year businesses often try to defer income beyond 30 June and bring deductions to pre 30 June. In the case of expenditure it can be a case of paying things like insurance before tax time. This is particularly important for individuals this year as there will be a slight tax reduction next year.
For businesses that are carried on in a trust, the trustee has to make a determination by 30 June of the amount of trust income that each beneficiary of the trust is presently entitled to. If they don’t do that by 30 June then the income off the trust is subject to tax at up to 49%. It’s quite a punitive element of carrying on business in trusts.
Private companies will make loans to shareholders throughout the year. They need to make sure that the loans are repaid by the time they lodge their return for that year, otherwise it will be treated as a dividend.
Record keeping is of course key. You want to make sure your records are in order and it’s obviously easier to do this throughout the year than collate it all at the end. There are all sorts of tools out there now, including apps that the Tax Office provides, for recording expenditure, receipts etc.
Many online businesses involve sales. What sales tax issues should eCommerce businesses be aware of?
Interestingly, Australia doesn’t have sales tax anymore. In terms of GST you have to make sure that you’re registered when you meet the threshold of $75,000. You also have to think about whether your sales are subject to GST, as exceptions can apply. You may also not be able to claim credits for GST on expenditure you incur if you are not registered for GST purposes.
Are there any other tax rules specific to online business owners that you’re aware of, or any particular tips you can offer?
There are a couple of things that are worth pointing out. If you have a small online selling business you need to identify if it’s a business or a hobby. The ATO has a simple list of questions to help you identify this.
You should ensure that your online records are capable of capturing GST and other financial data so that you can then roll that into tax returns.
Another unusual thing people should be aware of is that businesses often find that they have their data stored offshore – that their website is housed in an offshore data centre – and in some cases when sales are effected through the website the business can unwittingly become subject to tax in a foreign country. It’s important to understand where your website is being hosted and where the sales contracts are being formed, to make sure that you’re not exposing yourself to this risk. Businesses should talk to their legal adviser about this when setting up their website or subsequently if they haven’t already.
What are the rules around having paid staff and/or contractors during the year?
Expenditure deductibility is generally determined by when it is incurred – this is not dependent on payment. However, in very small businesses that operate on a cash basis, the expenditure may need to be paid before it is deductible.
Bonuses are an important factor with employees – bonuses are only deductible if definitively committed by year end, which won’t be the case if you are determining who is entitled to a bonus and how much after year end. For example, a bonus that is dependent on the business making a profit won’t be deductible as the profit will generally not be determined until after year end.
Also, superannuation contributions are not deductible until they are contributed to a complying superannuation fund.
In addition to tax, what other services could an accountant offer a business throughout the year?
There are a few things that a good accountant would be able to do for a business. They should be a general source of information and provide some training, such as GST management. They should be able to advise their clients of changes to the law. They’ll be able to bring industry knowledge and offer general business advice. Accountants can look at things holistically throughout the year and give advice about testing growth opportunities, whether you’re over or under leveraged – trying to find the right mix of debt and equity.
They can also act as an intermediary between your business, your lawyers and other financial advisers, particularly when you’re looking at selling or buying a business, managing things like the financial data preparation.
Can you think of three great questions people should ask their accountant?
- Have I looked at all the deductions I should have and what else can I claim?
- What’s coming up in the next year that I need to be aware of?
- What can I change to improve the tax effectiveness of my business?